09/2020
The first eight months of 2020 produced Winners and Losers in S-REITs. And the difference in the Winners and Losers are as stark and clear as the difference between black and white. The difference lies in the ability of the REIT to deliver consistent Dividend Per Unit (DPU) growth to investors, pandemic or not. We have highlighted and have been proven correct in 2017, 2018, 2019 and now in 2020 again, that the ability to deliver DPU growth is the key in S-REITs superior performance.
The first eight months of 2020 produced Winners and Losers in S-REITs. And the difference in the Winners and Losers are as stark and clear as the difference between black and white. The difference lies in the ability of the REIT to deliver consistent Dividend Per Unit (DPU) growth to investors, pandemic or not. We have highlighted and have been proven correct in 2017, 2018, 2019 and now in 2020 again, that the ability to deliver DPU growth is the key in S-REITs superior performance.
The effects of Covid-19 have led REITs to withhold back distribution income from shareholders. It is a good indicator to investors as the strong REITs hardly held back any DPU or had any rental deferment affecting its DPU severely. On the other hand, the not-so-strong REITs have had to withheld back a large portion of their distribution income to cover the rental rebates and rental deferment that it’s not-so-strong tenants faced. While the Covid-19 affected all REITs and businesses, the fortunes of the strong REITs verses the weak REITs are clearly played out in the latest interim results.
What we have always Taught in our REIT classes
The DPU is the sum of all the quarterly or semi-annual dividends. It is the metric that has consistently ranked as Number 1 for investors to invest in REITs. Thus, the smart investor should always pay close attention to all the numbers that lead up to the calculation of the DPU and the way it is being reported. It is one of the best metric to assess the profitability and health of a REIT and spot any underperformers.
As in our quarterly REITs class, we have always highlighted that the ability of S-REITs to deliver outperformance should not be based on growth in revenue or NPI or Distributable Income, but on the DPU. https://gcpglobalsg.wixsite.com/gcpglobal/blogs/the-ability-to-deliver-dpu-growth-is-the-key-in-sreits-outperformance-in-3q2017.
Assessments of the top and worst performing REITs in the past decade on a year-on-year basis, has also underscored what we have been teaching about the DPU as a great measure of REITs performance.
Looking Through 1H2020 S-REIT results
The Underperforming REITs
Soilbuild Business Space REIT
Table 1 - Despite full contribution from its newly acquired property in Australia, Soilbuild REIT still posted an 11.8% drop in NPI to $16.17 million for 2Q2020
What is more alarming is that the total amount available for distribution to shareholders fell by a greater 24.7% to $9.46 million or to just a meagre DPU of 0.745 cents. This is the lowest quarterly DPU registered by Soilbuild REIT since 1Q2015. In fact, with two exceptions in 3Q2015 and 4Q2016, the REIT has registered negative Quarter-to-Quarter (Q-to-Q) DPU growth in the last 22 sets of Quarterly results. It must have been a painful experience for the long-term Soilbuild REIT investor.
Table 2 - Soilbuild REIT has registered negative Quarter-to-Quarter (Q-to-Q) DPU growth in the last 22 sets of Quarterly results
And the share price of Soilbuild REIT clearly mirrors the gradual fall in quarterly DPU over the past 22 quarters. It has plunged from 87 cents in 2015 to just 43 cents as at end-Aug 2020.
Table 3 - Share price of Soilbuild REIT clearly mirrors the gradual fall in quarterly DPU over the past 22 quarters
OUE Commercial Trust
Table 4 - When it comes to the metric that matters the most – DPU, the OUE Commercial REIT reported a tremendous fall of 40.5%
OUE Commercial REIT showed positive growth in both revenue and Net Operating Income (NPI). This was due to its merger with OUE Hospitality Trust. However, when it comes to the metric that matters the most – DPU, the REIT reported a huge 40.5% fall in its DPU.
Lippo Malls Indonesia Retail Trust (Lippo Malls)
Table 5 – Revenues and NPI suffered humongous fall for Lippomalls
Lippo Malls registered a sharp 65.6% drop in GRI and an equally sharp 67.7% plunge in NPI as had a temporary closure of its 23 malls from late March till early May, in line with the Indonesian government’s call for large scale social restrictions. Only essential services like supermarkets, pharmacies and clinics had remained operational during the closure period.
It is interesting that Lippo Malls has just announced that it is going ahead with the purchase of Lippo Puri Mall for $330.2 million when its market cap has been decimated to $345.4 million on Mon 31 Aug 2020.
Table 6 - Lippo Malls has just announced that it is going ahead with the purchase of Lippo Puri Mall for $330.2 million when its market cap has been decimated to $345.4 million
The proposed acquisition of Lippo Puri Mall will constitute almost 96% of its market cap. How is that for diversification, never mind the humongous discounted rights that will be coming? GCP Global student investors have known that we have an AVOID AT ALL COST on Lippomalls in the past 5 years. We have always warned on REITs before their prices goes on a rumble tumble. Nonetheless, sitting on the side lines, it is a wonder how are the fiduciary duties of the manager owed to the shareholders, is being delivered in this announced deal?
Table 7 – Lippomall share price: GCP Global student investors have known that we have an AVOID AT ALL COST on Lippomalls in the past 5 years. We have always warned on REITs before their prices goes on a rumble tumble.
LESSON LEARNED An increase in gross revenue and NPI should always come with an increase in DPU. DPU is how much an investor gets for every unit they own of the REIT. A jump in gross revenue and NPI without a corresponding increase in DPU could mean that the REIT has issued new units priced at sharp discounts to raise funds. Most S-REITs have always justified their acquisitions as yield-accretive, but investors should be looking for DPU-accretive. It is our contention that if a REIT has to resort to cheap fund raising via a deeply-discounted rights or a placement of shares, to fund an acquisition, the transaction should not be consummated as it erodes shareholders’ interest. Throughout my experience, I have not seen many REIT acquisitions, financed by cheap rights or placement shares, done well in its share price.
The Outperformers
Keppel DC REIT
Table 8 – Another fabulous result by Keppel DC which saw its Distribution income to unit holders grew 38% while the all-important DPU achieved a fabulous double-digit growth of 13.6% to 4.375 cents
Keppel DC REIT has been our one of our favorite stock since we promoted it at $1.14 in our Sat 13 Aug 2016 REITs class. We particularly highlighted that the structure of the leases, the lengthened WALE, the relatively god price paid and the good quality of asset were the kind that would propel share price and DPU growth in the future.
Keppel DC achieved a 29.8% growth in revenue and 32.1% jump in NPI in 1H2020. Distribution income to unit holders grew 38% while the all-important DPU achieved a fabulous double-digit growth of 13.6% to 4.375 cents. The acquisition of Keppel DC Singapore 4 and DCI in 4Q2019 and the addition of Kelsterback Data Centre in May 2020, contributed to the positive performance.
Keppel DC REIT is only REIT other than Ascendas India Trust, AIT (For full transparency, I need to declare that I am also AIT’s Top 20 Shareholder) that achieved a sold double-digit growth at DPU level in 1H2020. It is no wonder that it is the Top Performing REIT in Jan – July 2020. Its share price closed at $2.91 at 31 Aug 2020, up almost 50% from 8 months ago. Clearly, Keppel DC REIT exemplified what we have been teaching and expounding on for the past 31 years – The key to superior performance among S-REITs lie in the ability to deliver strong DPU growth, Covid or non-Covid.
Table 9 – Keppel DC REIT has shot up 255.3% since we recommended the REIT in our REITs Quarterly class on Sat 13 Aug 2016
LESSON LEARNED
The key in making money in S-REITs and multiplying your wealth is the ability to pick good REITs at cheap prices at the right time in your portfolio. Hand-in-hand, the perspicacious REIT investor should recognize the conditions to avoid the not-so-good or Underperforming REITs which not only will they cause your wealth to dwindle, they constantly stir up problems for investors ranging from operation problems to or issues relating to their sponsors. A lot of time is needed to understand these problems while the share price takes a heavy hit. The sagacious REIT investor should look to always avoid such problems. We recognize this and will bring you our “What makes a Good REIT and what makes a Good REIT Great” in our next Mastering the Art and Science of REITs class on 26 Sep 2020. Do sign up HERE to take advantage of the Early-Bird Special which will be available for the current week. We will cover which are the Good REITs to have in your portfolio and help you detect the REITs that will go into rumble tumble, before they do so.
GCP GLOBAL RECOGNISED AS ASIA’S FOREMOST EDUCATOR IN REITS IN THE SINGAPORE CORPORATE AWARDS 2019
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